The European Commission today stressed the need for budget discipline among euro zone members and issued an upbeat report that forecast a pickup in economic growth from the third quarter.
In its second quarterly report on the 12-country economy, it said external demand was making up for domestic demand being more sluggish than anticipated, and even viewed the euro's rise on the foreign exchanges as more helpful than harmful.
But the Commission sounded alarm bells on budget discipline and insisted that euro zone members had to keep their past budget pledges.
The Commission has previously said Germany, France, Italy and Portugal need to do more to rein in budget deficits.
European Economic and Monetary Affairs Commissioner Mr Pedro Solbes took a tough line with Italy, after admitting the tensions were being felt in the Stability Pact.
"The obligations of Italy continue to be valid," he said, referring to commitments endorsed by EU leaders in June.
These commitments would require Italy, the euro zone's third largest economy, to achieve a budget position that was close to balance in 2003 and do even better in 2004, Mr Solbes said.
Portugal’s budget deficit had reached 3.9 per cent of output in 2001, nearly a full percentage point above the three per cent ceiling after which countries risk fines according to the Stability Pact.
While the Commission expressed concern about budgets, it was happier with euro zone economic prospects.
The EU report said the euro's past decline had helped boost competitiveness and that its more recent gains were not expected to erode market share immediately but have a delayed impact which only would be felt at a time when recovery had taken hold.
The only fly in the ointment as far as the euro was concerned was that consumption seemed to have been dampened by the switch to euro cash in January as people overestimated price hikes from the change and delayed consumption.